How can Governments stimulate green finance?

HOW CAN GOVERNMENTS STIMULATE GREEN FINANCE?

An article published in the financial media Institutional Investor looked to scrutinise the UK Government’s strategy to develop ‘world-leading Green Finance capabilities’. Here are our thoughts on what the governments should do to stimulate investment in longer-term sustainable development. Morphic’s Joint CIO Chad Slater indeed worked on both sides of the fence: he was first an economist for the Australian Federal Treasury doing policy advice, and he now works on the private side.

To tax or not to tax, that is the question

The good news is: the UK’s carbon tax implemented four years ago has been a great success. Even that well known left-leaning paper, the Telegraph, acknowledges this.

Economists – myself included – originally wanted a “cap and trade” model, like the NoX and SoX of the 1980’s as it was more “capitalist”. But as it turns out, it didn’t work that well, as evidenced by the EU carbon pricing.

So, we would strongly recommend the UK to keep it and if anything put prices up, along with an income tax cut for the equivalent amount or more of pounds that revenue is raised.

Economists hate “allocated” revenue in government. But the Tories need to show that higher energy prices don’t make you worse off if you get more than that in tax cuts – it’s just changing the relative price signal. E.g. your power bill goes up by $100 a year, but with 1% reduction in income tax, you have $110 more cash in the bank. You can choose to spend it all on the higher power price, or more likely, you use less power via spending some on double glazing. The choice is yours. It’s how markets work best. Another good side effect is that zero carbon emitters such as wind farms, don’t theoretically need a subsidy anymore. This should make the far-right happy.

Lastly, to kill off another myth, it doesn’t make industry “uncompetitive” in the same way Absolut Vodka is sold around the world despite Sweden having a very high tax on alcohol. You simply rebate the exported amount and tariff the imported carbon (the same way Sweden tariffs alcohol like wine from Australia).

How about picking and financing the winners?

Like the right-wing, I’m not a fan of governments handing out cash for new low carbon ideas (even though we run an ESG fund!). Picking winners for government let alone private sector is notoriously difficult – it is just impossible to know in advance. But if one insists, then one initiative that is interesting is the “reverse auction model” in an “Emission reduction fund”.

Economists are skeptical – the cost of reduction is higher than the other models – but it is an innovative way to spend money.

Financing universities

Lastly, if they insist on backing winners on the ground of innovation – which seems to be the case in the early stage investment fund in the Clean Growth strategy – I’d say they should allocate directly to universities in research grants. The UK has some of the best universities in the world – they should use them.